I'm trying to grow mushrooms on wood chips outdoor. Everything was going well until recently, the mycelium was spreading and I was hopeful to get fruiting by the fall. However a few days ago this nasty-looking fungus started growing on the surface of the wood chips... I attach some picture. Also it generally starts to grow white and then turns brown as in the picture, and sends a smoke plumes (of spores I suppose) when disturbed. Anyone knows what that is ? and how to get rid of it ? Was thinking to use some sort of flame-thrower all over the surface to kill these while my mushroom mycelium would be protected deeper in the chips.

It looks to me like a variety of slime mould fruiting bodies (stemonitis) they usually only set spores when all the nutrients have been extracted from the substrate (and they can feed on the mycelium of mushrooms).

I would hazard a guess and say that it has killed off your mushroom mycelium and usurped it's place.

Slime mould isn't technically a fungi, it's a protozoa. It still hasn't got an official classification in the animal/vegetable kingdom.